Assessing the Impact of China’s Developmental State on Economic Growth and its Poor
Many of those who most fervently praise China refer to its remarkable achievements in relation to lifting hundreds of millions of Chinese citizens from absolute poverty. Although this is the case, it warrants further investigation into the impacts of Chinese developmental policy on the poor within the country. While, yes, they have been lifted from absolute poverty, what have been the impacts of soaring inequality? Are people’s lives, despite not being subjected to dire poverty, much better? Is there still a long road yet to be journeyed before China’s poor are truly rescued from the jaws of social and economic purgatory?
To analyse these questions first demands an understanding of China’s developmental state and the impact its policies have had on rapid economic growth. For the purposes of this article, a developmental state will be defined within the context of its state objectives and institutional arrangements rather than being linked to precise policies, usually industrial in nature (Knight, 2014). Under such a definition, China can be easily examined as a developmental state due to its government’s propensity for imparting utmost importance toward policy mechanisms that promote economic growth as well as institutional arrangements and incentive structures which work together in tandem to achieve economic growth objectives (ibid.).
As Haggard (2018) notes, despite China not necessarily slotting smoothly into the prototypical mould of a developmental state, its high growth has been fuelled by authoritarian principles; its bureaucracy has been motivated by incentives and is broadly competent; it has focused on capital investment; and it has been highly selective with regards to marrying liberalisation with its targeted industrial policies. However, where China does deviate from traditional developmental states is in its attitudes towards decentralization, foreign investment, and government intervention into the business sector or indeed, state ownership within key sectors (Meier, 2009). China’s predominant objective appears to revolve around engagement with globalisation and capitalism all while maintaining its state-led approach to domestic development so it can “differentiate itself developmentally and ideationally” from neoliberalism while simultaneously promoting and upholding the liberal international order of global free trade (Horesh and Lim, 2017, p.438). In essence, China’s developmental model can best be summarised as follows: it actively creates “national champions” which are Chinese businesses ensuring Chinese brands and goods are globally competitive; it shifts away from low-skilled, low-cost labour to promote a growing middle-class, seeks to improve domestic consumption, and devotes an increased quantity of resources to providing public goods beyond infrastructure (Dickson, 2011, p.39). Building upon this, China also has implemented agricultural reform to kick-start poverty reduction, committed to experimentation and research for informing policy direction, and placed a foreboding emphasis on the state’s role in overseeing development (Hsu, 2015).
Now to address the questions referred to in this article’s introductory paragraph. First, China’s year-on-year GDP growth is evidently impressive, having averaged roughly 10% for over three decades and lifting 800 million people from absolute poverty (Karagiannis et al, 2020). There have, however, been negative externalities from such great economic performance. For one, competition between regional and local governments as they pursue profit has resulted in uneven and unequal development, environmental degradation, and exploitative employment (Howell, 2006). Secondly, state-capitalism, according to Selwyn (2009), has resulted in suppression of workers, particularly with regards to representation, and suppression of other forms of social power. In essence, developmental state policies “serve the interests of a would-be globally competitive capitalist classes and this should not be conflated with serving the interests of the world’s poor” (ibid, p.176).
Hsu (2015, p.1765), similarly to Howell and Selwyn, harbours concern over the problems that result from China’s growth, asserting that its development has “led to the emergence of many more problems than it has solutions”. Chinese policy had, under Mao, resulted in a heritage of urban-rural inequality where by 1979, average incomes for rural households were less than 40% of urban households, while welfare services were also far inferior in agricultural communes than they were in urban areas (Selden, 1996; Nordhaug, 2012). While increased productivity in agriculture, side employment in local urban areas, and higher grain prices raised rural incomes momentarily and hence lowered inequality between them and urban centres, this trend ceased in 1984 (Nordhaug, 2012). Following 1984, the trend of increasing inequality began again and remained high as agricultural productivity slowed once more in the transition to family farming (ibid.). The price for grain procurement was lowered by authorities and the tax burden was significantly heavier for poorer provinces than their richer counterparts (ibid., p.417). This was juxtaposed by a booming urban industrial sector propelled by special export zones and export promotion (ibid.).
Even where migration from rural to urban areas took place, migrants faced tough conditions. They became an underemployed and low-cost industrial labour reserve who were predominantly employed by unregulated private companies in contrast to urban citizens who were employed by the public sector and who received high wages, higher quality working conditions, and welfare rights which were not offered to migrants (Nordhaug, 2012). This division and inequality between urban citizens and migrants were enshrined and accentuated by the hukou system which deprives migrant workers of the welfare entitlements offered to urban counterparts (ibid.). Even in general terms, rural hukou holders possess much sparser welfare rights than urban hukou holders and children who are born in urban centres to migrant parents inherit their parents’ rural hukou and by virtue, the same sparse welfare rights (Naughton, 2007; Wang, 2010).
Despite China’s acclaim among neoliberals and statists, China’s living standards appear to be falling for large quantities of urban and rural workers even as average income rates rise (Selwyn, 2014). Dispossession, conducted as a means to create market dependence through marketisation and commercialisation, caused mass unemployment, decreasing calorie consumption, deteriorating health, and “degradation for tens if not hundreds of millions” of China’s poor population (ibid., p.175). Particularly during the 1990s, nutritional intake suffered due to rising food prices (Reddy, 2007). In Selwyn’s (2014) view, the capital-labour relationship in China is constraining rather than promoting human development. Indeed, China’s economic growth and expansion has been rooted in exploiting its rapidly growing labour class (Hardy and Budd, 2012). In 2004, electronic workers, for example, needed to work 15-16 hours per day in appalling working conditions just to earn minimum wage (Itoh et al, 2004). In the footwear industry, the situation is equally gloomy, with the average workday approximately equalling 11 hours per day, 7 days a week, equating to an 80-hour work week (Chan, 2007). Moreover, as China’s political governance allows little room for dissention or free expression, labour is stymied in any attempt to unite and collectively act (Selwyn, 2014). Fortunately, there have been successful instances within China of collective action and mass protests which have resulted in slowly increasing wages while making the government increasingly anxious about potential political instability (ibid.).
As this latter case of collective action would suggest, China faces a challenge of maintaining social stability as it continues along its path of economic development (Hsu, 2015). In fact, despite many Chinese citizens welcoming political elites’ goals of modernisation, consumerism, urbanisation, and global integration, the truth is that the contradictory reality that exists between lived experiences and these goals has weakened the state’s mobilising capacity to pursue these goals (ibid.). This is particularly the case related to the criticism China’s developmental model has drawn due to mistreatment of ethnic minorities and discrimination in its developmental practices toward minority regions (ibid.). Hsu maintains that the state’s failure to redistribute wealth and address the core causes of increasing inequality will potentially lead to growing social unrest (ibid.). This is perhaps one of the reasons we are currently witnessing a Chinese government that is frantically consolidating its grip on all aspects of Chinese life and even its quasi-autonomous regions such as Hong Kong.
Furthermore, the Chinese state’s retreat from the health sector has also adversely impacted regional inequality (Hsu, 2017). Marketizing healthcare adversely affected healthcare affordability and further entrenched impoverishment for rural residents (ibid.). Even where schemes exist that deliver health services on a cooperative basis, these schemes are insufficient to meet the needs of rural patients who cannot afford rising out-of-pocket expenses (ibid.). China’s Gini coefficient has been rising steadily, roughly 7% per decade, becoming synonymous with Chinese development (Hsu, 2015). Although, optimistically, this trend appears to be decelerating and indeed, reversing somewhat (The World Bank, 2020). Moreover, even in the realm of poverty reduction, most of the success occurred in early stages of reform prior to influx of FDI (Hsu, 2015). However, as alluded to, as poverty reduction thrived, inequality was rising in tandem. Consequently, life satisfaction in 2010 was no higher than it had been in the 1990s despite absolute increases in per capita income (Easterlin et al, 2012). There are also significant differences in levels of human development and life satisfaction across China which is once again exemplified by urban-rural divide (Hsu, 2015). For example, while Beijing or Shanghai’s scores on human development approximate Portugal, other regions such as Tibet and Guizhou approximate Tajikistan and Laos (ibid.). Thus, the extent of inequality stems far beyond merely income.
How China can Alleviate Negative Impacts on its Poor
Off the bat, China can no longer frame development as merely an economic growth or industrialisation issue and must broaden their scope to consider human development and the social sphere. In essence, China’s developmental success moving forward will be decided by its capacity to solve its problems pertaining to an ageing population, inadequate social safety nets and healthcare (Hsu, 2017). Of course, income will be a vital component of this human development (ibid.). However, it is important to note that pursuing human development objectives will also weaken incentive structures that preserve developmental state policies (Knight, 2014). As such, China will need to undertake an adept balancing act to address societal issues while maintaining incentives that spur growth.
One of the key drivers of welfare inequality was China’s restructuring of state-owned enterprises (SOEs) which saw SOEs shift from dual-purpose organisations aimed at preserving welfare and conducting business to becoming merely profit maximisers which unsurprisingly abandoned their prior welfare commitments (Nordhaug, 2012). In this case, China offers a bleak example of a common phenomenon described by Leftwich (1995) of new developmental states directly attacking civil society. In contemporary China, the government now uses a contracting out model for delivering social services which allows the market to dictate the service and NGOs compete for contracts (Hsu, 2015). All the while, the government maintains a close regulatory eye and monitors from a distance (ibid.). The government sees this as a means to achieve efficiency and recentralise power, or “big society, small government” (ibid., p.1764).
Fortunately, China is “making headway in collaborating with social stakeholders to ‘co-produce’ things like health and welfare” (Hsu, 2017, p.1105). However, the lack of feedback mechanisms needs to be addressed as currently it is difficult to inform future social programmes, as the state lacks awareness of the successes or failures of NGOs and other service providers (ibid.). In essence, Hsu argues that China needs to achieve a more efficient and effective balance between “authoritarianism and meaningful participation of social organisations in co-producing welfare and social services” (ibid., p.1110). In sum, the key to future success in social services will be how China approaches redistribution and social welfare provision. Moreover, the central government will face a difficult path gaining the acceptance of local governments who will lose aspects of their global competitiveness where the government aims to recentralise to improve its capacity for redistribution of resources (Howell, 2006).
Hence, while China is currently improving with regards to inequality (apart from the apparent inequalities and discrimination present in minority regions but that is an issue for more specific discussion), China will need to balance national and local interests if it is to tackle social and regional inequality while ensuring growth and social stability (Breslin, 1996). As Karagiannis et al (2020) allude to, however, there appears to be a solid commitment from the central government within their most recent five-year plans to address and tackle social and environmental issues. The hope is that, alongside these commitments, the government takes on more responsibility for the provision of welfare and health services. It may also be fruitful to overhaul the hukou system, but that may be unlikely. Furthermore, China will need to address the labour conditions present within its borders.
China has the economic firepower. China has successfully combatted poverty reduction. Now China must tackle the social inequality and the adverse circumstances many poor people find themselves in.
Conor Nolan is the Deputy Secretary General of European Guanxi. He holds a degree in International Commerce and Chinese and is currently pursuing a Masters in International Relations at University College Dublin. His research passion includes the future of democracy, the European Union and China, Foreign, Climate and Trade Policy. He aims to contribute to the debate on EU-China relations while improving the agency of young Europeans to have their voices heard. You can find him on Titter as @conornolanIRL and on LinkedIn.
The opinions expressed here are those of the writers and do not represent the views of European Guanxi.
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